Microsoft joined Amazon, Alphabet, and Meta in a planned bid to cut jobs.
Microsoft announced on Wednesday, January 18, 2023, that it is cutting 10,000 jobs amid slowing PC and cloud sales.
The tech giant confirmed that the layoff exercise will be completed by the end of the third quarter of 2023.
While each company is slightly different, most companies going through layoffs are blaming macroeconomic conditions and the possibility of a future recession as the reason for their belt-tightening.
However, behind the slowing sales and macroeconomic headwinds, is an unappreciated factor of how rapidly the companies ramped up hiring over the last two years.
- Big Tech companies like Microsoft, Amazon, Meta, etc., rapidly expanded their staff during the pandemic to keep up with demand. Between June 2021 and June 2022, Microsoft added some 40,000 Jobs; Meta added 13,366 jobs between December 2020 and December 2021, while Amazon added 310,000 in the same time frame.
Now the techs are forced to reckon with the unsustainable growth they saw during the pandemic. After all, Microsoft reported that its office commercial products and cloud services revenue increased in Q1 2023
- For example, the company reported that Office Commercial products and cloud services revenue increased by 7% (Up 13% in constant currency) driven by Office 365 Commercial revenue growth of 11% (Up 17% in constant currency).
- Also, revenue in Intelligent Cloud was $20.3 billion and increased by 20% (Up 26% in constant currency).
Will the layoff improve the company’s fortune or exacerbate the company’s already declining earnings growth?: The layoff as explained by the company is expected to collectively result in a charge of $1.2 billion in the second quarter of the 2023 fiscal year, representing a $0.12 negative impact on diluted earnings per share.
- Microsoft’s earnings growth has been on a downward trajectory; from a +34% per year compounded annual growth rate (CAGR) over the past five years to a 19% decline over the past year.
- In Q1 2023, Microsoft surpassed expectations on the top and bottom lines, but cloud revenue was lower than expected, and the company’s quarterly guidance fell short of expectations as well.
- The Tech giant reported 11% on-year growth in revenue to $50.1 billion, but a 14% decline in net income to $17.6 billion.
- The company also reported earnings per share of $2.35 per share, vs. $2.30 per share as expected by analysts, but down 13.28% from the $2.71 reported a year earlier.
Following the year-over-year decline in Q1 2023, Microsoft shares fell about 7% in extending trading on October 26, 2022. In the 2022 FY, the share price fell by about 29%.
So far this year, Microsoft shares have fallen by 1.61%. However, the company and analysts believe the company will come out stronger.
- Microsoft’s CEO Satya Nadella told employees in a memo that was posted on Microsoft’s website “I’m confident that Microsoft will emerge from this stronger and more competitive”
Microsoft has a flawless balance sheet, of good value, and pays dividends.
- Based on its price-to-earnings ratio of 25.2x compared to the US Software industry average ratio of 40.1x, it is cheaper.
- Microsoft pays a dividend, but it is yielding 1.15% now.
- Though the yield is not notable compared to the bottom 25% of dividend payers in the US market (1.54%) and low compared to the top 25% of dividend payers in the US market (4.31%), with its reasonably pay-out ratio of 27.2%, dividend payments are well covered by earnings and cash flows.
Investors will be hoping for strength from Microsoft as it approaches its next earnings release on January 24, 2023.
- Microsoft is projected to report revenues of $52.93 billion, indicating growth of 2.32% from the figure reported in the year-ago quarter according to the Zack Consensus estimate.
- However, they expect earnings to decline by 7.6% from the figure reported in the year-ago quarter
The upcoming announcement will show how things have shaped the outlook.
